Bailey v. Proctor
United States Court of Appeals for the First Circuit
160 F.2d 78 (1947)
Aldred Investment Trust (the Trust) was a mutual fund. The Trust was structured with the voting control vested in the owners of $150,000 in stock. The Trust was mainly funded by the holders of debentures, which contributed $6 million. Debentures are financial instruments that promise to pay holders a fixed amount of money on a future date, with interest paid periodically until the principal is paid. Debentures are appealing to fixed-income investors who desire safe and regular returns on their investments. However, a capital structure based on debentures presents the potential for abuse because of the skewed way in which the structure allocates risks and rewards between the stockholders and the debenture holders. The stockholders have a great incentive to invest in speculative stocks because the stockholders receive all the profit over the promised interest payment. Because the stockholders have relatively low equity in the Trust, the potential return on the investment is enormous. Additionally, the risk is mainly borne by the holders of the debentures because of the size of their investment. The Investment Company Act of 1940 prohibited these structures but did not require the liquidation or reorganization of existing investment companies. Hanlon led the original control group of the Trust and was caught in fraud and self-dealing. The Trust became insolvent, and a receiver was appointed by the court to take possession and control of the property. Bailey (plaintiff) and a group of investors purchased the controlling interest. One of the speculative investments greatly increased in value, which made the Trust solvent again. The trial court then ordered the receiver to liquidate the Trust. Bailey appealed to the United States Court of Appeals for the First Circuit.
Rule of Law
Holding and Reasoning (Mahoney, J.)
What to do next…
Unlock this case brief with a free (no-commitment) trial membership of Quimbee.
You’ll be in good company: Quimbee is one of the most widely used and trusted sites for law students, serving more than 725,000 law students since 2011. Some law schools—such as Yale, Berkeley, and Northwestern—even subscribe directly to Quimbee for all their law students.Unlock this case briefRead our student testimonials
Learn more about Quimbee’s unique (and proven) approach to achieving great grades at law school.
Quimbee is a company hell-bent on one thing: helping you get an “A” in every course you take in law school, so you can graduate at the top of your class and get a high-paying law job. We’re not just a study aid for law students; we’re the study aid for law students.Learn about our approachRead more about Quimbee
Here's why 725,000 law students have relied on our case briefs:
- Written by law professors and practitioners, not other law students. 45,600 briefs, keyed to 983 casebooks. Top-notch customer support.
- The right amount of information, includes the facts, issues, rule of law, holding and reasoning, and any concurrences and dissents.
- Access in your classes, works on your mobile and tablet. Massive library of related video lessons and high quality multiple-choice questions.
- Easy to use, uniform format for every case brief. Written in plain English, not in legalese. Our briefs summarize and simplify; they don’t just repeat the court’s language.